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Ottawa could tighten mortgage rules, Flaherty says

First-time homebuyers will probably have to wait until the spring home-selling season to see if Finance Minister Jim Flaherty will take steps to make it harder to finance a house purchase as a way of heading off runaway inflation in the residential market.

Finance Minister Jim Flaherty may make moves to target home buyers who may run into affordability problems when interest rates rise. (SEAN KILPATRICK / THE CANADIAN PRESS FILE PHOTO)

By Les WhittingtonOttawa bureau

Mon., Dec. 21, 2009

OTTAWA– First-time homebuyers will probably have to wait until the spring home-selling season to see if Finance Minister Jim Flaherty will take steps to make it harder to finance a house purchase as a way of heading off runaway inflation in the residential market.

With economists increasingly worried about a possible housing bubble, Flaherty said he is watching the uptick in home prices and will act to slow things down if need be.

"If we see further evidence that there is excessive demand in the housing market or that there's an indication that people are taking on obligations that they will not be able to handle in the future when interest rates rise, then we will take some action," Flaherty told CTV's Question Period, which will air later this week.

"The likely action we will take is to increase the size of the down payment from 5 per cent to a higher number, reduce the amortization - bring it down from 35 years to something less," he said.

Actions of that kind would make it more difficult for Canadians - particularly first-time buyers trying to assemble enough cash for a downpayment - to obtain a mortgage and buy a home.

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However, a spokesperson for Flaherty pointed out today that the minister is only saying the government would clamp down on mortgages if it is convinced that housing prices are rising to levels that cannot be justified by economic conditions. At the moment, Ottawa does not see a housing bubble.

"We don't think that there is a problem in Canada," the spokesperson said. "But we monitor this situation very closely and if there is an issue, and if further action is required, the government would be prepared to take it," the spokesperson explained.

Consumers will likely have to wait until spring, when seasonal housing sales pick up again, to see if Flaherty decides it's necessary to clamp down, said BMO Capital Markets economist Doug Porter. "Over the spring selling season would be the real test," he said.

Federal finance officials are always on the lookout for signs of an inflationary bubble in the housing market. But Flaherty's role in managing this aspect of the government's anti-inflation watch is greater now because of the economic strategy currently being pursued by the Bank of Canada.

Ordinarily, central bank governor Mark Carney would raise the bank's trend-setting interest rate to offset a worrisome burst of inflation. The higher Bank of Canada rate would lead to higher retail bank mortgage rates, in turn reducing demand and allowing the market to come off the boil. But, to try to boost economic activity, Carney has promised to keep the bank's overnight rate at the historically low rate of 0.25 per cent until next summer. This has kept consumer borrowing rates low and encouraged Canadians to take on more mortgage and consumer debt.

While the economy overall is only recovering slowly from the recession, the housing market is roaring back. Statistics Canada said two weeks ago that the average home price in the country's major markets hit $368,665 in October--up 18 per cent from the same time last year.

"The government doesn't believe it's a problem right now but it's a potential problem," Porter said. "The fact that the finance minister is talking about it suggests to me that the government has been seriously looking at ways to cool the housing market without necessarily resorting to interest-rate increases."

Carney has been warning in recent speeches against Canadians taking on too much debt because of the unusually low interest rates. When the economy returns to normal growth, the central bank will have to raise rates to hold back inflation, a development that could leave some Canadian households with an unsupportable debt load, the central bank governor has pointed out.

Worried by the collapse of the housing market in the United States as a result of the subprime mortgage debacle, the Harper government moved in mid-2008 to tighten up mortgage lending in Canada. The Canada Mortgage and Housing Corp. was ordered to shorten the maximum amortization period that it would accept to 35 years from 40 years. And it demanded a downpayment of at least five per cent of the value of a home.

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